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NEW YORK/CHICAGO, Dec 3 (Reuters) - CME Group Inc CME.O, the world's largest derivatives exchange, said on Thursday it plans to launch a clearing house for the $26 trillion credit default swap market by Dec. 15 and has signed eight of the largest credit derivative dealers to the service.
Barclays Capital BARC.L, Citigroup C.N, Credit Suisse CSGN.VX, Deutsche Bank DBKGn.DE, Goldman Sachs GS.N, JPMorgan Chase & Co JPM.N, Morgan Stanley MS.N and UBS AG UBSN.VX are joining the CME platform as founding members, the CME said.
The launch comes as lawmakers globally move to bring the $450 trillion derivative markets under the purview of regulators and make central clearing more widespread as a means of reducing risks posed by the default of a major swaps dealer and the web of exposure the contracts create among large financial companies.
Insurer American International Group Inc AIG.N needed a government bailout in September of last year after it sold hundreds of billions of dollars of protection on risky assets using credit default swaps and did not have adequate capital to back up its commitments.
Credit default swaps are used to protect against a borrower defaulting on their debt or to speculate on their credit quality.
Dealer preferences to clear trades through ICE Trust, part of the IntercontinentalExchange ICE.N, had created doubts that the CME would gain enough support to launch its platform.
ICE is the only clearinghouse in the United States to have cleared CDS trades.
The CME is, however, expected to benefit from strong support by fund managers, many of whom may be lured by the ability to cross margin CDSs contracts against their futures positions.
“The buy side seem to like the CME model more than ICE,” said Kevin McPartland, senior analyst at TABB Group in New York. “There is a lot of buy-side volume that hasn’t touched a clearinghouse yet, so everybody is essentially starting from zero.”
ICE, which has a revenue sharing agreement with large dealers, has cleared about $4 trillion in notional CDS contract value since March when it launched its U.S. clearinghouse. The company started clearing European CDS in July.
The CME’s decision to bring in buyside clients “was a Hail Mary pass to see if you could bring pressure on the brokers to break ranks and work with them. It appears to have worked,” said Brad Hintz, an analyst at Sanford C. Bernstein and a former Wall Street executive.
“CME as a general rule is viewed by the Street as a competitor. ICE is viewed by the Street as a technology ally,” he said.
CME shares rose 1.75 percent to $334.
The dealers join CME's buy-side founding members, AllianceBernstein, BlackRock Inc BLK.N, BlueMountain Capital Management, the D.E. Shaw Group, Pacific Investment Management Co, and Citadel Investment Group. Citadel was CME's original joint venture partner for the offering.
The volume of trades cleared through the CME offering may initially be light due to the December holiday season, making it hard to judge the success of the offering until next year, said McPartland.
The CME will clear credit default swaps protecting the debt of a single issuer in addition to indexes, Craig Donohue, chief executive officer at the exchange, said in the release.
A group of fifteen of the largest derivatives dealers told regulators in June that they would offer buy-side market participants access to all viable clearing credit default swap solutions by Dec. 15. (Reporting by Karen Brettell and Jonathan Spicer in New York; Additional reporting by K.T. Arasu in Chicago; Editing by Kenneth Barry)
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